In a move that is sparking a firestorm of protest regarding the extension of retirement plans to uncovered workers, the US House of Representatives advanced two bills to overturn federal rules that would make it simpler for states to start individual retirement accounts (IRAs) for private-sector workers who do not have 401(k)s.
The February 15 vote in the Republican-controlled House of Representatives seeks to delay a US Department of Labor (DOL) regulation that was passed in August 2016 that set up a procedure for individual states that would allow workers to enroll in IRAs that would be funded through employer’s payroll deductions. Currently, these plans are available in about half of the 50 states.
At issue are whether the plans, known as Secure Choice Plans (SCPs), or “auto-IRA plans,” would allow designated private-sector employers to automatically deduct a percentage of their workers’ pay and forward it to state-sponsored IRAs and 401(k)s.
The proposed IRAs would have contribution limits of $5,500 each year, plus $1,000 for employees 50 and over. These are similar to current IRA limits.
One operational sticking point was that the rules in the Employee Retirement Income Security Act (ERISA) of 1974 regarding 401(k) plans did not allow states to implement payroll deduction IRAs because it wasn’t clear how ERISA would regard state-based 401(k) plans. However, the DOL rule enacted last summer would prevent ERISA from pre-empting state law. In this case, states that already had their own regulations would be able to establish IRAs and be exempt from ERISA.
But on the political front, well-funded advocates on both sides are lining up to push their positions. At issue is whether workers with no retirement coverage in the private sector should be able to enroll in state-sponsored 401(k)s. The concern is that employers may push participants out of their private plans and into those run by the state.
The number of workers without access to 401(k)s is huge: AARP estimates that 55 million workers cannot save for retirement from their regular paycheck. A Government Accountability Office (GAO) study found that about half of private-sector workers in the United States, especially those working in low-income jobs or employed by small firms, lacked coverage from an employer’s retirement savings program primarily because they lacked access. According to GAO’s analysis of 2012 Survey of Income and Program Participation (SIPP) data, about 45% of private-sector US workers participated in a workplace retirement savings program. The GAO said among those not participating, the vast majority (84%) lacked access because they either worked for employers that did not offer programs or were not eligible for the programs that were offered.
In its 2015 recommendation, the GAO suggested that Congress “consider providing states limited flexibility regarding ERISA preemption to expand private sector coverage. Agency actions should also be taken to address uncertainty created by existing regulations. Agencies generally agreed with GAO’s recommendation.”
So far, 28 states have enacted or are exploring legislation to allow workers to have access to retirement plans, according to the Pension Rights Center. States that have enacted this legislation to date are California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon and Washington.
The Massachusetts plan is currently available for workers at small nonprofits, but the state has introduced legislation to expand the program to private-sector workers who don’t have a 401(k).
Extending Retirement Benefits Become Political
While the proposal is straightforward, the House of Representatives vote has ignited a firestorm of competing positions from the political right and left. Republicans generally consider a plan that extends retirement savings accounts to uncovered workers to be an imposition of state and federal regulation into the private sector.
The conservative Heritage Foundation said the proposed program would hurt savers and cost taxpayers.” An article by Rachel Greszler, Senior Policy Analyst, Entitlement Economics at the Heritage Foundation, argued the SCP program was “the equivalent of Obamacare for retirement savings—that is, if you like your current 401(k), you may not be able to keep it.”
Similarly, Will Hansen, senior vice president of retirement policy for ERIC, a group representing the largest 100 corporations in the US, said his group was opposed to the DOL rule to rescind coverage because “we realize that states are infringing on rules that offer retirement plans. We are not against the state implementing a state-run plan as long as it does not infringe on employers that already run retirement plans.”
As an example of state overreach, Hansen cited legislation in Oregon that might regulate employers who are already offering a plan, but would imposed minimum standards that exist at the federal level, such as who is eligible to be covered, rules covering minimum number of hours worked annually, and age. The Oregon legislation would force employers to include seasonal workers and those under age 21, he said. ERIC’s position, he said, was that the DOL rules should “not infringe on any employer who offers a federally-compliant, ERISA retirement plan. We needs to agree on retirement coverage in America, but our members think this DOL rule is going to hurt our members and their ability to enroll in a plan,” he said.
In an ERIC report, the group also said it was concerned by the addition of a 90-day requirement that would force an employer who provides a retirement plan to employees to file an exemption or conditional exemption if the employer offers the retirement plan to all or some of its employees within 90 days of being hired.
ERIC said this would harm “large employers who design their retirement plans with a range of eligibility dates, so long as the eligibility date is in compliance with federal laws and regulations.”
An alternative view was offered by Hank H. Kim, Executive Director and Counsel, National Conference of Public Employee Retirement Systems, Washington, D.C., who said in a written response:
“The Secure Choice Pension model is a beacon of hope for the 55 million Americans who don’t have access to a workplace retirement savings program. A dozen states and cities have chosen to facilitate the creation of workplace savings programs after years of analysis, study, debate, and legislative action, and more are poised to follow suit. Now, Congress could hobble these innovative programs by using an obscure law to get rid of regulations that provide legal protection to state-facilitated IRAs.
“These state-facilitated plans were devised to fill an unmet need that American workers and small business owners are clamoring for. Employer-based retirement plan sponsorship rates have been declining for decades. Today, only about one-half of workers are even offered a plan. The private sector has not solved this problem, and that’s why states invested years in research and study to develop public-private sector solutions.
“We’ve heard the alternative facts advanced by the sponsors of these resolutions, but they don’t hold up under scrutiny. State-facilitated retirement savings plans would be responsibly managed for the benefit of savers and only savers, would meet the needs of employers, and would ultimately save taxpayers billions of dollars. Helping the states navigate the most effective way to provide additional retirement security for Americans is the right thing to do.”
But due to its scope and complexity, this is not a black-and-white issue. Chris Tobe, vice president of investments, First Bankers Trust, said that while he is “a huge supporter of the fiduciary rule and hopes that Republicans let it continue, I like the concept of providing lower-fee options for non-government employees, but I have been very suspicious of this initiative. I see this as connected with the Hillary Clinton initiative backed by Blackstone, which has been frustrated by its inability to get its high-risk, high-fee products into corporate 401(k) plans. Like in public defined benefit plans exempt from ERISA, I believe Blackstone felt that a public DC plan could be a back door for them to get their products into this market. I believe because of Citizens United, these public plans would be susceptible to politicians pushing them into high-fee products in exchange for untraceable donations to their super PACs, etc.”
James Watkins III, CEO and Managing Member at InvestSense, said “While I believe the House’s actions are mainly motivated by the desire to help big business, their point about the fact that SCPs do not provide the consumer protections that ERISA does is a valid concern, since SCPs would be administered by the states, some of which do not have the best track record in fiscal management.
“On the other hand, when over half the workers in the US (54.6%) do not have access to some sort of a pension plan, that’s obviously a situation that has to be addressed. As an ERISA attorney, when I first heard about these plans, my first two questions were first, do the rules have meaningful provisions to truly protect a plan’s participants, since SCPs would not be covered under ERISA? And secondly, what provisions are included to effectively control the costs associated with the plans and ensure prudent investment of the plans’ funds?
Watkins advocates for low-cost index funds to be included in any SCP since they are cost effective and minimize any potential conflicts of interest. He also suggests that the best option would be some sort of hybrid SIMPLE-IRA plan. “This plan would provide the protections provided under ERISA with minimum, and relatively easy, regulatory/compliance time and costs. The employer would make the contributions and receive the tax deduction. The plan participant would have the right to select the investments in their plan, which would be limited to index funds as investment options. Again, there are no clear black and white answers here, but I think a modified SIMPLE-IRA plan has merit in terms of cost efficiency and being in the “best interests” of plan participants in terms of providing protection and a meaningful chance to save for retirement.”
By Chuck Epstein